TAGS: small business news, small business tax enforcement, IRS Notification of Possible Income Underreporting, credit vs. cash transactions, cash-based companies, small business tax letter

WASHINGTON -- Under the heading "Notification of Possible Income Underreporting," the Internal Revenue Service has sent letters to thousands of small businesses asking them to take a second look at their taxes. The campaign targets businesses accepting credit and debit cards, especially traditionally cash-based companies with an above average percentage of sales made with cards.

Businesses were selected for inquiry by comparing national averages of credit or debit card transactions with cash transactions. Although the IRS has noted the letters do not represent an audit, it is requesting small business owners to complete a form to "to explain why the portion of your gross receipts from noncard payments appears unusually low."

While the letters were sent to a relatively small number of small business owners (so far about 20,000), they have left many wondering whether the government is gearing up for a crackdown in an attempt to close the so-called "tax gap" by searching for harder-to-track cash payments, which are more often underreported.

That gap, which represents the difference between what is legitimately owed and what is actually paid, is estimated to be more than $100 billion for small businesses. The concern among small businesses is whether the letters focused on credit card transactions are only a first step in what may prove to be a significant increase in scrutiny by the IRS on mom-and-pop companies with a large percentage of cash transactions.